macro chapter 17 presentation 1- keynesian/classical/monetarist balance of payments
TRANSCRIPT
Macro Chapter 17
Presentation 1- Keynesian/Classical/Monetarist
Balance of Payments
Classical Economics
• Started with Adam Smith in 1776• Dominant theory of economics through the
1930s• Belief that “Laissez-Faire Economics” is best---
government should let it be because full employment is the norm
Classical Economics Contd
• The AS curve is vertical and is the sole determinant of output
• The downsloping AD curve is stable and determines the price level
Classical Economics
Pric
e Le
vel
P2
P1
Qf
Classical Theory
Real Domestic Output
AS
AD1
AD2
a b
c
Say’s Law
• The idea that supply creates its own demand• When supplying goods, workers earn money
and then spend $$ on goods/services• $$ that is saved is then loaned out and spent
as well
Keynesian View
• Product prices and wages are downwardly inflexible
• AD is unstable• Government intervention is needed to
maintain economic stability• Horizontal AS curve up to QfAnd then it is vertical or Upsloping intermediate range
Keynesian Economics
Pric
e Le
vel
P1
QfQu
Keynesian Theory
Real Domestic Output
AS
AD1
AD2
y x
Theory of Rational Expectations
• The idea that people learn to anticipate government interventions
• They act according to how the government will act
• Ex- if people expect government spending or the $$ supply to increase (which increases AD and P) they will demand more wages to offset the inflation which will negate the gov’t policy
Monetarist View
• Changes in the money supply are the greatest determinant of economic growth and the business cycle.
• The government should keep the money supply fairly stable to control inflation- expand the money supply slightly over time to keep up with growth
Quantity Theory of Money
• Velocity and Q are stable (in the MV = PQ equation)
• Increasing the money supply will have a direct effect on price (increase)
Balance of Payments
• A net statement of all international flows of money over a given period of time
Balance of Payments Cont’d
Comprised of:1. Current-Account balance = trade balance +
services balance + transfers 2. Financial (Capital) Account Balance = foreign
purchases of home assets – home purchases of foreign assets
3. Official Reserves- the balance of current and financial accounts
***BOP always equals Zero***